Does Taking Out a Student Loan Hurt Your Credit?

Taking out a student loan does not inherently harm your credit. Its impact depends on how the loan is managed. While there are immediate, minor effects, the long-term influence on your credit profile is primarily shaped by your repayment behavior. Student loans, like other forms of credit, can serve as a tool to build a positive credit history when handled responsibly.

The Initial Credit Inquiry and New Account

Applying for a student loan often initiates a “hard inquiry” on your credit report. A hard inquiry can cause a temporary, minor dip in your credit score. This type of inquiry remains on your credit report for up to two years, though its direct impact on your credit score fades after 12 months.

Federal student loan applications do not result in a hard inquiry. However, private student loans or Direct PLUS Loans involve a credit check, leading to a hard inquiry. When shopping for student loans, multiple inquiries for the same type of loan within a short window (14 to 45 days) are treated as a single inquiry by credit scoring models. This allows borrowers to compare loan offers without incurring multiple negative impacts.

Opening any new credit account, including a student loan, can also temporarily affect your credit score by reducing the average age of your credit accounts. If you have a limited credit history, this effect might be more noticeable. However, this initial impact is slight and temporary, with scores rebounding within a few months as you begin to manage the new account responsibly.

How Payment Behavior Influences Your Credit Score

Your payment history stands as the most influential factor in credit scoring, accounting for 35% of a FICO Score. Consistently making on-time payments on your student loan demonstrates financial reliability to lenders. This significantly contributes to building and maintaining a strong credit score, showing a responsible approach to debt obligations.

Conversely, late or missed payments can damage your credit score. For private student loans, a payment can be reported as late to credit bureaus after 30 days past the due date. For federal student loans, this occurs after 90 days. The longer a payment remains past due, and the more frequently payments are missed, the greater the negative impact on your score.

When a student loan goes into default, the consequences are long-lasting. Default for federal student loans occurs after 270 days of missed payments, while private loans may default sooner based on lender terms. A default can cause a significant drop in your credit score and remains on your credit report for up to seven years. Beyond credit score damage, defaulting can lead to actions such as wage garnishment, the withholding of tax refunds, and the loss of eligibility for future federal student aid.

Student Loans and Your Overall Credit Profile

Student loans contribute to your overall credit profile as a type of installment credit, distinct from revolving credit like credit cards. Having a diverse “credit mix,” which includes both installment loans and revolving credit, can positively influence your credit score, representing 10% of a FICO Score. This diversity demonstrates to lenders that you can manage various types of debt responsibly.

The long-term nature of student loans can also benefit the “length of credit history” factor, which accounts for 15% of a FICO Score. Student loans are among the first credit accounts opened, and their extended repayment periods contribute to a longer average age of accounts on your credit report. This extended history, especially with consistent on-time payments, signals stability and experience in managing financial obligations.

While credit utilization is a factor for revolving credit, it has less direct impact from installment loans like student loans. Credit utilization primarily measures the amount of available revolving credit you are using. However, responsibly paying down the principal balance of a student loan, like any debt, demonstrates financial management and contributes positively to your overall financial health, which can indirectly support your credit standing.